NEW YORK, Jan. 14, 2015 /PRNewswire/ -- IEX, a fair-access Alternative Trading System owned by traditional investors, announced accelerated adoption for its latest innovation: the Discretionary Peg Order Type (D-Peg). D-Peg was designed in response to an industry-wide issue: "crumbling quotes", or slower, predictable changes in the National Best Bid and Offer (NBBO) of a stock. Due to the nature of a highly fragmented market, quote changes can take several milliseconds to occur and/or propagate over market data, creating an actionable signal for certain strategies.
Early adoption has been encouraging – introduced in November, Discretionary Peg orders comprised 11% of IEX's December volume, or 13% of midpoint volume.
"Price changes expose traditional investors because faster traders are able to predict the fair price of a stock before they can," said Brad Katsuyama, IEX CEO and Co-Founder. "D-Peg is designed to help orders resting at IEX avoid being picked off while the quote is changing. This is an incremental and complementary layer of protection on top of our 350 microsecond 'speed bump' – which protects orders after a quote change in the market. One problem occurs over milliseconds while the other over microseconds, and though the difference may seem subtle, innovating for both is important in order for IEX to consistently deliver the fairest possible price for any stock."
By default, D-Peg orders peg to the primary side of the bid-ask spread, but can trade up to the midpoint at a level set by the contra-party's limit – maximizing both trading opportunities and price improvement. However, in "crumbling quote" situations, D-Peg orders stay pegged to the primary, which helps the order avoid adverse selection, defined as trading at soon-to-be stale prices.
Jefferies, a global investment bank and IEX Subscriber, observed an improvement in execution quality after adopting Discretionary Peg. "ICF (Information Content Factor) is a proprietary benchmark we've developed to measure toxicity," said Jatin Suryawanshi, Head of Global Quantitative Strategy for Jefferies. "Since fully migrating over to Discretionary Peg, the liquidity at IEX has demonstrated close to a zero ICF, which implies that on average there is almost no market movement following an IEX execution. This ranks IEX among the top dark pools and exchanges that we trade with."
"Our approach is straightforward: build solutions which address specific market structure inefficiencies and imbalances," said Ronan Ryan, IEX CSO and Co-Founder. "We have found that there are times when a price change can be predicted milliseconds before it occurs due to technology inefficiencies in the market. A human is unable to leverage this prediction, but a machine can. In these instances, D-Peg helps our Subscribers and their clients – who shouldn't have to invest in expensive, complex trading technology – avoid situations where the deck is stacked against them."
"Because we choose not to pay rebates or offer other distortive incentives, we must earn order flow by providing a real service to our subscribers," continued Katsuyama, "and we earn it by protecting the orders that are entrusted to us. Our innovations reduce the need for traditional investors to build or buy complex technology in order to consistently receive the fairest possible price."
For more information on how D-Peg works, read IEX Trading Alert #2014-022: http://iextrading.com/trading/alerts/2014/022/
IEX is the first equity trading venue seeded by a consortium of buy-side investors, including mutual funds, hedge funds, and family offices. Their unique ownership consortium represents a cross-section of traditional investors who are all dedicated to a fair and balanced market that works for all participants. IEX operates a fair-access platform for any qualified broker dealer, and was built on the principle of investor protection, delivered through its proprietary anti-colocation architecture and simplified pricing and rule set. IEX was featured in the best-selling book, Flash Boys, written by Michael Lewis.
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SOURCE IEX Group, Inc.